Nov. 10, 2008 – Surviving the storm

By Steve Bauer
Managing Editor
Despite the recent volatile U.S. market conditions, the powersports industry has shown a greater resistance to economic pressures than other recreational industries.
“Our sales, although down, aren’t anything like you’re seeing with the marine and RV industry, big box retailers or food sectors,” said Mark Blackwell, vice president of Victory Motorcycles and International Operations. “Although we’re disappointed with our earnings as compared to our forecasts, in a market like this it certainly could be much, much worse.”
In fact, Victory’s parent company, Polaris Industries, is one of a few powersports OEMs that reported increased third-quarter revenue.
So just how insulated are publicly traded powersports OEMs from the recent market volatility, especially with dealers reporting decreased customer traffic and tighter credit restrictions in the past month? The answer lies in each company’s ability to control rapidly fluctuating production costs, expand international operations and shift R&D and manufacturing to growing segments of the market.
Soaring costs of raw materials
One of the biggest obstacles OEMs are faced with is producing competitively priced units despite the swiftly changing costs of raw materials, such as steel and oil.
“Everything we use to manufacture our tires has gone up in price over the last year,” said Lisa Guest, Michelin’s two-wheel marketing communications manager. “We used to change our pricing moderately every few years, but in 2008 we’ve had to change pricing several times, which we’ve never had to do. If we were to receive a 3 percent price increase from a supplier, for example, that’s understandable. But when it jumps double digits three times in a year, that’s unprecedented. But that’s what is happening with the markets as volatile as they are.”
As a result, the company says another increase might be necessary in the future if market conditions don’t improve. And Michelin isn’t alone. Several other tire manufacturers, including Bridgestone, have announced price increases on their products in 2008 as well.
Increased production costs recently forced global motorcycle manufacturers to announce price increases on their products as well, a sensitive issue with dealers already faced with trying to sell units to financially cautious consumers.
“Unfortunately it’s really out of the control of the OEMs,” Blackwell said. “Especially in the past month, prices of raw materials are fluctuating so rapidly it’s nearly impossible to try and predict anything long term.”
Falling stock prices
Even with continued R&D, timely new product releases and a stronger commitment to ensure their dealer networks are getting as much support as possible, many publicly owned OEMs continue to see significant drops in their stock value.
According to data provided to Powersports Business by Wachcovia Capital Markets, companies such as Fairchild Corp., Harley-Davidson and Brunswick have lost anywhere from 18-74 percent of their stock value since Sept. 29. Overall, stocks in North America, Europe and the Asia-Pacific region had all fallen by about 30 percent since the beginning of the year. The Dow Jones Industrial Average alone has fallen about 37 percent since January.
According to Steven Jansen, a market analyst for ESG, which specializes in Dow Jones Industrial Average stock trends, large decreases in stock value place added pressure on a company’s ability to produce capital, ultimately limiting their ability to increase R&D, marketing campaigns and other vital tasks crucial to remaining profitable.
“In a market like this it can be argued that it’s much more beneficial to be a privately owned company, as the market doesn’t dictate your actions nearly as much as it does if you’re trying to appease your shareholders,” he said.
International opportunities
One bright spot for many OEMs is the success they have had in overseas sales, with Harley-Davidson, Yamaha and Honda all reporting increased international new unit sales despite decreased North American numbers.
According to Jansen, however, OEMs need to be cautious about being too aggressive in terms of international expansion, as many previously strong economies overseas are seeing dramatic downturns as well, especially in previous hot spots like China and India.
“(International expansion) might seem like the ideal growth opportunity for some OEMs who are seeing domestic opportunities slow down,” he said. “Many of our clients are looking overseas but my belief is that they must deal with the health of their domestic operations first as international expansion comes with its own set of strains, including tariffs, shipping costs and other expenses.
“The most important and again beneficial change of the slowdown might be that many OEMs take a step back and realize they need to focus on their unit performance first, because that is essential in order to sustain and grow a manufacturer’s bottom line when the system is not expanding.”
Growth potential at home
With many companies eager to expand their international reach, Jansen argues that the best option for the time being is to focus on growth areas in the United States and Canada.
“I think Piaggio and KYMCO are good examples of companies that have really taken advantage of consumers’ interest in scooters as an alternative to higher gas prices and growing traffic congestion, and their focus on this particular segment of the market has paid off for them,” he said. “The same can be said for Polaris, Yamaha, Kawasaki and other companies that have capitalized on the growing interest in side-by-sides.”
Jansen continues that Americans still have quite a bit of purchasing power when compared with consumers in other countries, and companies that choose not to invest heavily in the U.S. market for the long term could be making a costly mistake.
Regardless of how the U.S. and global markets fare in the next 12 months, Jansen says that consumers’ continued interest in recreation, whether it be four wheels or two, is a sign that the powersports industry will continue to grow in the long term.
“This industry has some of the most loyal enthusiasts compared to any market,” he said. “As long as OEMs continue to cater to those consumers with new products and technology, the industry should come out of this economic storm in better conditions than many of its peers.”